South Africa Tax Developments
Two important administrative policy decisions have recently been communicated to tax practitioners by the South African Revenue Service (SARS).
1. SARS will not pay personal income tax refunds into third-party bank accounts, including employer accounts, even if the individual is tax equalized.
Legislative intervention will be required before SARS can change this policy; therefore, we do not expect this policy to change in the short-term. Consequently, employers should plan on having to collect over-payments from equalized expatriates in respect to 2011 and prior years.
2. Foreign earnings exemption claims (in terms of section 10(1)(o)(ii) of the Income Tax Act) will only be allowed by SARS to the extent that the taxpayer has income coded as ‘foreign’ on his or her end-of-year employee tax certificate (Form IRP5).
For example, salary can be coded as 3601 (local) or 3651 (foreign). If an employee’s entire salary is coded as 3601, no foreign earnings exemption claim will be allowed on assessment, even if some of the salary was actually sourced outside South Africa (i.e., foreign work-days eligible for exemption in terms of the statutory tests). SARS has stated that it may insist that employers re-issue IRP5s with correct coding before it will allow any such claims, even if the employee can prove he or she passes the exemption tests.
Employers must therefore be careful to code any foreign earnings as such on the IRP5. This allocation can be done at year-end if necessary. Note that the 2010-11 EMP501 Employer Reconciliation is due to SARS by Friday, 3 June 2011. IRP5s may only be issued to employees once the EMP501 has been successfully submitted to SARS.